Why LinkedIn is the Disrupter With Soaring Profits
The latest trend in hiring has more corporations bypassing executive recruiting firms in favor of using in-house HR departments for talent searches. This is, of course, a horrid development for executive recruiting firms. But it’s also just one more confirmation that LinkedIn’s (LNKD) disruptive innovation has given it god-like power over an entire industry.
Linkedin holds no ill-will against recruiting firms. It makes a lot of its money off of them. But with its huge database of professionals, job seekers and givers alike, LinkedIn makes money in job searches regardless of which side is doing the match-making. In-house hiring departments use it because LinkedIn holds a great pool of prospects on one easy-to-use website. Search firm professionals spend a lot of time on LinkedIn too, regardless of how many industry connections they’ve cultivated over the years. In fact, both sides are paying LinkedIn so much money now that its profits are ramping up quickly. That’s not happening at fellow market disruptors Facebook (FB) and Amazon.com (AMZN) now, and that advantage has given LinkedIn shareholders far better returns in the past 12 months.
LinkedIn’s financial trends – it beat fourth-quarter forecasts with an 81% revenue rise and a 192% profit rise last year -- are certainly much prettier for shareholders than those of the executive search firms. Robert Half International (RHI) just disappointed investors with an announcement of flat first-quarter revenue. ManpowerGroup (MAN) sales have been falling on intentional downsizing. Other agencies, including Kforce (KFRC), Korn/Ferry International (KFY) and Heidrick & Struggles (HSII) have struggled to rebuild sales lately.
Financial services company William Blair & Co. noted the LinkedIn effect on executive search firms in its quarterly survey of the companies last month. More search companies reported potential clients keeping that work in-house in this survey than any William Blair had conducted previously. LinkedIn, apparently, had made it a lot easier for corporations to hire management without their help. In other words, LinkedIn is now more essential than any other tool, professional or otherwise, for searching or filling professional jobs.
You say you prefer to find hire-able executives through personal connections? We bet someone in your office looks up those candidates on LinkedIn even before setting the first lunch date. Meet an impressive finance expert at a conference? Or a great salesperson that consistently beats your team in the field? Chances are, you’ll log into his LinkedIn profile before the courting begins. As for talented job seekers: a manager who isn’t smart enough to read the corporation’s LinkedIn page before the interview probably isn’t worth hiring. Even if he found the job listing on Monster Worldwide (MWW).
As William Blair notes, LinkedIn does not directly pocket the money that would have been spent on search firms. Corporations pay LinkedIn a lot less for its services than they would a recruiting firm, if they pay LinkedIn anything at all. But LinkedIn has launched numerous features in the past year that are bringing in more users and more payers every day. Last quarter, corporate recruiters (in-house and otherwise) paid it some $161 million to use its Talent Solutions tools, a 90% increase over the fourth quarter of 2011. Companies paid it $83.2 million, up 68%, for advertising that included job listings. Salespeople and job seekers forked over $59.4 million, up 79%, for access to members they deemed important.
While there’s a lot of faith on Wall Street that LinkedIn can build a great business, there’s not so much certainty that investors can peg a fair price for its shares. LinkedIn’s forward PE ratio of 687 is the highest in the S&P 500 and a level that makes it a particularly speculative play. Analysts worry that any minor disappointment from the company could spark big selling. There are as many hold recommendations on the shares as buys. It’s hard to value a company that is so pervasively changing the industry it works, as evidenced by the zigzagging lines on the price to sales ratio chart of three popular game-changers.
There are those in the business who still question LinkedIn’s status as an industry disruptor. Thirteen percent of the executive search consultants surveyed by William Blair said that LinkedIn was having no impact on their business. Sounds an awful lot like wishful thinking.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.
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